ACCA Applied Skills · Financial Management · Sources of finance and their relative costs
Kilo Co has 6% irredeemable preference shares with a nominal value of $1 each, currently quoted at $0.75 per share. The corporation tax rate is 30%. What is the cost of the preference shares for use in the WACC?
The cost of irredeemable preference shares is the fixed dividend divided by the market price, with no tax relief because dividends are not deductible. Dividend of $0.06 over $0.75 gives 8.0%.
- A8.0%Correct
- B5.6%
- C6.0%
- D4.2%
Explanation
Preference dividends are not tax deductible, so no tax adjustment applies. Kp = dividend / market price = (0.06 x 1) / 0.75 = 0.06/0.75 = 8.0%. The 5.6% option wrongly applies tax relief to the dividend.
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